Covered Calls by BetterTrades

A covered call is one of the basic stock and options strategies that are taught by BetterTrades in one of its workshops, some of them that are held regularly in the Las Vegas or Henderson area. Traders have been using covered calls for many years to "rent out their stock" and make a monthly profit. The technique has gained in popularity since the recession began, when many stocks dropped to historically low prices, and enables stockholders to make a small premium each month while they wait for the underlying asset to increase in value.

A covered call occurs when someone sells a call option on a stock that they own. The word "covered" simply means the stock is already owned and will meet an obligation, if necessary. If the stock was not owned, a trader would be "naked" or "uncovered" in their position, which is a dangerous place to be. The BetterTrades formula calls for the trader to buy (or already own) the stock and then sell the call at the next strike price up for the current month or one month in the future. This is commonly known as the buy-write, which is code for buying the stock and selling the option.

How does a trader make money on a covered call? It's a very simple process and works best in a bullish market. Let's say you own 1000 shares of XYZ stock that is valued at $20 and want to follow the BetterTrades rules and perform a buy-write. You could sell 10 contracts of the XYZ stock at the next strike price ($12.50) and bring in a premium of $1 per share, which would be $1,000. If the value of the underlying stock does not reach $12.50, a trader gets to keep the amount they were paid in premium and gets to keep the stock. If the value of the stock reaches or exceeds the strike price, the trader is obligated to sell the stock. Thus, if the stock is worth $12.50 per share, the trader will be forced to sell the stock, but will do so at a gain. In the above example the profit would be $3.50 per share - $1 per share in premium and $2.50 in the increase in the stock price (from $10 to $12.50).

That sounds so easy, so why don't people do it all the time? The main problem is that the profits are capped on a covered call, since a trader is obligated to sell at the agreed-upon strike price. This means that the stock could double in price, but the trader's profit will only be the difference between the original stock price and the strike price.

A more advanced strategy taught by BetterTrades involves waiting for a stock to reach resistance and begin to turn down before entering in the position. At that point the trader will purchase a call at the next out-of-the money position for the current or next month out. It is recommended that traders don't stay in a covered call position for more than six weeks of time.